Senate Banking Committee Returns to Market Structure Issue

The Senate Banking Committee, chaired by Rep. Tim Johnson, D-S.D., returned to the subject of Market Structure, which has drawn heightened attention since the publication of Michael Lewis' book Flash Boys as it held a hearing titled "The Role of Regulation in Shaping Equity Market Structure and Electronic Trading."

Two panels of witnesses enabled further exploration of the question of the year, "Are Markets Rigged?"

In opening remarks Johnson apologized for the prevalence of jargon in the discussion of Market Structure. He observed that while the markets have rallied, there have been reports of declining investment and loss of faith on the part of investors. At the same time, they disagree as to what reform should entail.

Johnson declared that he is pleased that the Securities and Exchange Commission (SEC) is moving forward with a study of Market Structure and with a pilot program to experiment with tick sizes intended to foster greater interest in stocks of small-cap companies. He called for any reform to be based on good data and to be implemented as quickly as possible. (Readers will note that in the context of the SEC, the word "quickly" is relative.)

The ranking Republican, Sen. Michael Crapo, R-Idaho, repeated his usual admonition that U.S. markets must remain "the preferred destination" for capital for investors. He referred to the assurance by SEC Chair Mary Jo White that the markets aren't rigged, but he allowed that there are issues under the heading of Market Structure that "need to be addressed."

While the cost of trading has declined and speed has increased to the point where execution times are measured in sub-seconds, Crapo stated that the markets must have the ability and resiliency to handle that traffic. He blamed investor concerns on the SEC itself, its Regulation National Market System and "the patchwork approach the SEC has taken in the past." For Crapo, "investor confidence is the key," and he warned that "the markets cannot afford another Flash Crash."

Interestingly, Sen. Dean Heller, R-Nev., is one senator who has worked as a trader and passed the series 7 examination. He mused that the venue where he worked, the Los Angeles trading floor of the Pacific Stock Exchange, no longer exists. He expressed concern about the effects of the Federal Reserve's policy of quantitative easing, but he looked forward to working toward improving confidence and stability for markets.

One of the star panelists was Jeffrey Sprecher, who went from nowhere 14 years ago to the almost incidental acquisition of the New York Stock Exchange (NYSE) by his company, the Intercontinental Exchange (ICE). While the middle-of-the-road position of the witnesses was to await the results of the SEC's studies before enacting reforms, Sprecher served notice that he is willing to act unilaterally to simplify the business by reducing the number of orders.

The other star was the last witness, David Lauer, president and managing partner of KOR Group LLC, who presented such an outstanding statement that perhaps he and Sprecher will be able to accomplish more than the SEC's Market Structure study will. Lauer lamented that he had testified before the committee two years ago, and the SEC hadn't done much since then.

In other highlights, at one point Sen. Mark Kirk, R-Ill., started to ask Sprecher about a conversation with Michael Lewis. When Sprecher responded that he didn't have such a conversation, a frustrated Kirk yielded back his time.

Finally, Sen. Elizabeth Warren, D-Mass., has been asking, if the markets aren't rigged, how is it that two trading firms can go through the equivalent of 10 years of trading with only one down day? It reminds this writer of the legendary response of Bill Clinton to Monica Lewinsky's complaint that she hadn't seen him for months: "Every day can't be sunshine." But for these traders, every day is sunshine, and Warren asked how this can happen in a real market.

The Senate Banking Committee, chaired by Rep. Tim Johnson, D-S.D., returned to the subject of Market Structure, which has drawn heightened attention since the publication of Michael Lewis' book Flash Boys.